Tuesday, 06 September 2011 09:06

Eurocalypse Trading Update 9/6/2011: 100% On Point On Bearish Call, Despite Nasty Bear Market Rally!!! Featured

Trading commentary from BoomBustBlogger resident trader, Eurocalypse...

It's Labor Day in the US, but mkts are already in the move in Asia and Europe. The previous week ended on a quite bearish note, with red ink in all stock markets, especially financials, and moves that exceeded the implied volatilities/breakeven moves, after a period of relatively calm. This is hardly a surprise to us. Really! Any BoomBustBlogger who has put on any of the bearish positions recommended in the subscription material is due to be very, very richly rewarded in the next day or two. I can’t recall any good economic data last week, and one should be foolish to expect anything good anytime soon when all stimulus has been withdrawn, and austerity mode is full ON.

Still I believe the most significant development in the last days is not in the stock market but in the PIIGS crisis again, and on that note my full trading opinion can be downloaded by all subscribers here Eurocalypse Trading Update 9-6-2011.


10Y Italian yields have resumed their uptrend, with supply hitting the market through a very poorly received auction last week. As I have said before, no money manager can buy this Italian debt. This statement must be emboldend, for on Tuesday, 19 July 2011 I wrote "Didn't Anyone Notice The Seemingly Irreparable Damage To The Eurozone Last Week? Global Short Ban, Here We Come!":

When last week's Italian 10Y surged from 5% to 6%, it marked something irreparable, which was not indicated in the extent of the move, but its violence.
Six percent, as we know, is unsustainable for Italy (more than its GDP nominal growth which is closer to 2-3% today, and getting worse...)

Whats even more important is that VAR has gone crazy everywhere. Not only banks, even insurers and money managers take volatility of an asset as an input. When you lose 7% in capital in one week, which is 7x the 100bp spread you hoped to make in 1 year, something is very wrong. Even stock market indices failed to sell off as much in a week (and rarely do so)...
Thusly, nobody in their right mind is going to buy Italy (or Spain). The only natural buyers now stem from:

    1. short covering (profit taking) activity,
    2. passive buying from Italian accounts for ALM purposes (they must be "invited" to do so)
    3. and public buying trying to prop up the market, but their pockets aren't deep enough.

As a result, we may have the very few next auctions doing ok (especially if yields go up and short covering continues), but then its chaos Portugal-style.. it could take only a few weeks (or even days!) from here.

The only way I envision it not happening is Euro-bonds gaining traction and actually being implemented (but that doesnt seem likely if you believe the press reports) or financial repression.

Financial Repression???!!!

By financial repression, I mean taking out short sellers,,,, seriously! Not only banking stocks (like was done in 2008):

    1. SEC Extends Ban On Shorting Of Financial Stocks - Forbes.com Oct 1, 2008 – Restrictions will expire Oct. 17, about the time a slew of bank earnings are set to be released.

    2. SEC Halts Short Selling of Financial Stocks to Protect Investors Sep 19, 2008 – SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets. Commission Also Takes Steps to Increase Market Transparency ...

    3. S.E.C. Temporarily Blocks Short Sales of Financial Stocks ... Sep 19, 2008 – The Securities and Exchange Commission issued a temporary ban on short ... Short selling — a bet that a stock price will decline — is the ..

but on govt debt as well, making void all CDS contracts on sovereigns (or saying they will expire or cash settle at a very soon date) and trying to shut out HFs by increasing regulation, disclosure and taxation on them.

Excess volatility is not good for the markets, and it would surely cause huge short covering, but it could buy some time, and if the move is surprisingly large (bringing us to 4% range...!!!) then maybe it's not just buying time, and we are underestimating the extent of the short sellers which currently have the market in hand (and we know all the "good" reasons why).

Now, with the benefit of hindsight, we now know that I was much more prescient observative than many a long would be keen to admit!!! When the 10Y yields shot up from sub 5% to 6.3% in a few weeks’ time, VARs exploded. Traders and Money Managers just can't take any positions anymore (or only a fraction of what they could) and for choice, those who can take positions from a flat book, would prefer to be short, of course !!! Thus the only buying activity has been from tactical short covering and some passive domestic buying, but basically all the non-domestic non-passive demand has vanished, and the ECB just can’t make for all of that.

So it is only a matter of little time when Italy and Spain implode like Greece or Ireland or Portugal, especially with all the auctions hitting the market after the summer vacations. In this light, the post Did You Know That The Upcoming Italian Auction Can Spark Contagion That Touches A BIG US Bank? is s!imply indicitave of the chickens coming home to roost, and the subscription document that highlights the sytemic US bank that is at risk here is a very valuable document indeed! Subscribers, reference File Icon Actionable Note on US Bank/ French Bank Run Contagion, then follow up with the respective retail and pro versions of the subsequent docs on that subject bank.

So it is hardly a surprise to see the indexes down in Europe led by financials. Reggie has been spot on all along on that, and I am 100% with him on the big picture, and actually I may be even more pessimistic than he is. Think USSR 1989, (Crony) Capitalism 2012.


I wrote last week to go short again the SP @ 1177, and to increase short positions when we traded 1215 before the payrolls. It was tough given the false double bottom signal, but that proved the correct choice. As I wrote, despite being oversold in the longer term charts, the European markets were vulnerable after the short squeeze, and and we called it over, especially in financials, reference Bank Run Candidate Option Trading Update (referencing native exchange pricing, ADRs are available for US investors.

Cutting gamma may have been a bit of a bad idea, but even with Fridays and todays move, which reminds that shorting vol is NOT a good idea, longs have had difficulties to make for the lost theta. Even though I’m pretty sure were in a bear market, I’m not sure we will see a straight line down from here. I still believe in my targets (see previous trading tips) of 1030 in SP and that if a crash in European markets happen, there will be a consequent bounce to play.

Many of the remaining recommended option strategies on the downside, are spreads which perform better if we don’t go down too fast until the end of the month, though the Armageddon November SP 1100 put is still alive.

Anybody who has followed the western European markets full know that the Reggie Middleton calls on French bank runs have been spot on. The French banks have basically been decimated as the markets start to truly realize what BoomBustBloggers have knew for months by now... Just As Predicted Over The Past Month, The French Bank Run Seems To Have Commenced. The French banks are truly getting slaughtered. For those who haven't been following Reggie and BoomBustBlog on this topic, you have missed out on an amazing call that I have not seen replicated anywhere! Below are a list of public links that detail the call:

  1. France, As Most Susceptble To Contagion,…
  2. The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

  3. What Happens When That Juggler Gets Clumsy?

  4. Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such

  5. Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year

  6. The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

  7. The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!

  8. Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run

  9. Observations Of French Markets From A Trader's Perspective

  10. On Your Mark, Get Set, (Bank) Run! The D…


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Last modified on Tuesday, 06 September 2011 13:09

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